Warning bell sounding on European debt

While global markets rallied strongly overnight following the temporary cease-fire in US budget hostilities, highly regarded US economist
Joseph Stiglitz
has warned that Europe’s ongoing debt crisis remained the major risk for the global economy this year.

Stiglitz pointed to the economic woes of Spain and Greece, saying these countries “are in an economic depression with no hope for a recovery." He argued that the euro zone’s “budgetary pact" aimed at forcing countries to cut their deficits was “not a solution", while bond-buying by the European Central Bank could at best be “a temporary palliative". According to Stiglitz, “if the ECB insists on countries following an austerity program as a condition of its financing, that will only lead to a deterioration in the patient’s condition".

He noted that European politicians have failed to craft a “growth pact" that would boost economic activity in peripheral euro zone countries. As a result, he didn’t rule out fresh turbulence in the eurozone this year.

Stiglitz’s warning comes as two of the region’s largest economies – Germany and Italy – face elections this year, which could impede the ability to respond to a fresh crisis.

Italy is heading to the polls in late February, in what could be one of the most important elections in the country’s postwar history. Italian finances have stabilized after the year-long technocratic government led by Mario Monti. But Italians are growing tired of austerity, and already investors are nervous that former Italian leader
Silvio Berlusconi
may stage a comeback.

Overnight,
Mario Monti
, who has indicated that he is prepared to lead a coalition group of centrist parties that embrace his reform program following the election, launched a stinging attack on Berlusconi’s ethical values, accusing him of using “inappropriate weapons, such as family values".

Several days ago, Berlusconi, who has been involved in numerous sex scandals, and who is running for the sixth time in Italy’s next elections said he had received “much praise [from the Church] for his interventions on ethical subjects, while Monti’s program said not a word on these important themes."

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But Berlusconi was quick to respond to Monti’s criticism, claiming that he “no longer had any credibility" for Italians, because Monti, a former Italian economics professor, had promised not to go into politics when he agreed to lead a technocratic government in November 2011.

Berlusconi, a 76-year old billionaire businessman, also criticised the “worsening economic situation" under the Monti government, and repeated his demand for a “commission of inquiry" into how his own government fell, with the implication being that Germany had played a role. Berlusconi was forced to resign in November 2011, as the country’s debt crisis threatened to spiral out of control.

At this stage, Italy’s centre-left Democratic Party is leading in the polls, and its leader, Pier Luigi Bersani, has committed to largely following the austerity and reform program introduced by Monti. But Bersani is expected to need allies from the far-left to form a governing majority, which will make it difficult for him to pursue a reform agenda.

With the euro zone facing a tough year, there are fears that German Chancellor Angela Merkel will be reluctant to commit to any major rescue plans ahead of German elections that are expected to be held in September or October.

Many observers believe that, with the euro zone in recession and unemployment in many countries rising sharply, greater emphasis should be put on boosting economic growth, rather than austerity. In addition, they argue that a more credible “banking union" is needed to shore up the region’s fragile financial sector.

But Merkel, who is seeking a third term, will be likely to oppose any move to allow debt-laden eurozone governments to continue to run large deficits, or to guarantee the deposits of all euro zone banks, because of fears that such measures will spark an outcry from German taxpayers, who will be on the hook for hefty additional liabilities.